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The borrowers who struggle the most with their student loans are more likely to come from low-income backgrounds or to have never completed a degree.
Those are some of the takeaways from data released this month by the Department of Education on its portfolio of defaulted student loans.
And though student debt is often viewed as a young person’s problem, the data indicates that roughly one-third of the defaulted student loans are held by borrowers who are at least 50 years-old. That’s even though older borrowers make up roughly 20% of federal student loan borrowers overall. Ten percent of borrowers in default are at least 62, according to the data.
Terrence Horan/MarketWatch
Student-loan borrowers who default on their debt face the harshest consequences in the student-loan system. These borrowers are at risk of having their tax refunds, Social Security benefits and wages garnished to repay their loans.
The data reinforces some of what advocates, like student-loan experts and attorneys, know about who is most likely to face challenges repaying their student loans. The Department released the figures as part of the process to help shape its new debt-forgiveness plan.
The final proposal won’t be available for at least several months, but the agency has indicated it would like to provide debt relief to borrowers that in some ways overlap with the demographics of borrowers who are overrepresented in default. The Department has said it would like to provide cancellation to borrowers who owe more than when they started repayment and have been paying on their loans for a long time, among other categories.
Most borrowers in default received a Pell grant
About two-thirds of borrowers in default received a Pell grant, the money the government provides to low-income students to attend college, according to the data.
Low-income students are less likely than their wealthier peers to attend four-year colleges and more likely to attend schools that lack the resources necessary to help students get through school and into a decent-paying job. That can make it more difficult for them to repay their student debt.
The number of borrowers in default who didn’t complete a degree was more than double the number of borrowers in default with a degree, according to the data. Borrowers who didn’t complete school are at high risk of struggling to repay their debt because they don’t have the credential that’s supposed to provide a boost in the labor market, but they still have the debt.
Older borrowers, who are overrepresented among borrowers in default, can struggle to repay their student loans for a number of reasons. In some cases, they borrowed decades ago to attend a poor-performing school that didn’t provide them with a benefit in the labor market and the debt is still following them. In other cases, they may have taken on the debt later in life to re-tool and are facing challenges repaying the loans.
“If we’re seeing borrowers who are over the age of 50 or over the age of 60 and they’re still carrying that student-loan debt, it probably means they had hurdles in their working careers, or even many of them who are still working could not manage to repay that debt,” said Lori Trawinski, director of finance and employment at AARP, which advocates on behalf of older Americans.
Older borrowers may also struggle because they took on debt to help pay for their childrens’ college through the Parent PLUS program. Unlike undergraduate loans, which have a limit Parents PLUS loans are virtually uncapped — parents using these loans can borrow up to the cost of attendance at their child’s college. In addition, parents don’t receive the economic boost that comes with the degree the loans financed. Both these factors can make it challenging for many families to repay Parent PLUS loans.
Carrying debt into retirement can complicate borrowers’ financial lives
Regardless of the reason why borrowers still hold student debt as they near or are in retirement, the loans can complicate their financial plans, Trawinski said. That’s in part because student loans can be one segment of a larger portfolio of debt — including mortgages, auto loans and credit card debt — that Americans are increasingly carrying as they get older.
Traditionally, Americans have managed their financial lives through a life cycle that involves borrowing to fuel consumption when they’re younger, paying off the debt as well as saving during their prime working and income-earning years, and then spending those savings in retirement, Trawinski said. But that lifecycle has started to break down.
“It used to be that by 10 years after graduation — so maybe when you were in your 30s — you will pay off that student loan debt, you will have purchased your house and you’re making payments on that,” Trawinski said. “By the time you’re in your 50s, you’re nearing paying off your home, you will have paid off your student loan debt. What we’re seeing now is people are carrying higher levels of debt at younger ages, people are buying homes at a little bit later ages than they used to and for many people [the debt] is delaying the ability to save for retirement.”
For some borrowers, struggling with student debt as they age can put key sources of income at risk, like Social Security benefits and tax refunds. That’s because the government has extraordinary collection powers to seize this money to repay defaulted student loans.
The pandemic pause on student-loan payments offered a reprieve from these collection tactics. During that period, the Biden administration brought defaulted borrowers current. Through a program called Fresh Start, borrowers have one year from when student-loan payments resumed in October to take steps that will keep them out of default.
A year-long on-ramp following the resumption of student-loan payments also means borrowers also won’t be subject to debt collection tactics until at least 2025. Still, advocates worry that once these safeguards are lifted borrowers with defaulted student loans will face punitive collection tactics once again.
